Someone has it wrong. You "Factor" recievables not expenditures. New Home recievables come from buyers when they close. What we pay subs are expenditures. There is no such thing as factoring expenditures.

A "Factor" buys recievables at anywhere from 50-95% of the face value. They then own the recievable. If they don't get paid, they have no recourse. The seller gets immediate cash. It's used mostly in the retail trade. Say a company sells many retail outlets the same jeans. Some are sold on a 30 day pay; some on a 60 day pay; and some on a 90 day pay. To get paid immediately, they might sell those recievables to a "Factor."

There is no way to "Factor" new homes. The only recievable is from the buyer when they close. The "Factor has no interest in the product. They buy the invoice. In new homes, the recievable doesn't happen until the house is finished and the closing scheduled.

- they hire subs and promise to pay them 100 cents on the $1.
- they set up a factoring company that pays these subs $.70 for these receivables.
- KB doesn't pay the subs, thus saving 30% on their costs
- the sub gave up their right to the 30% b/c they sold their receivables for cold, hard cash

Is it legal? Absolutely. If a sub is willing to accept anything less than invoice; it's their right and once they do, they have no further recourse. However, they don't have to and can wait for 100%; or sue if they aren't paid.

However, as a business practice, it's a short term solution. Once subs learn of the prcatice, most subs won't do business with KB and others will overbid the work.

There is a well known builder in the DFW area who is known for short paying subs; he skips the "Factoring" phase. What happens is that most subs won't work for him.

The problem the DFW builder has and KB will have is warranty work. A sub who is only paid 70% of invoice has no incentive to do any warranty work or do any further work for the builder. Even in these terrible times; eventually the builder runs out of subs that will work for them.

I watched a CM for the DFW builder beg cement subs to pour a driveway so a house could close and none would. Several hung up on him. The one that he got to do the work required cash up front and then did the work two weeks later than he said he would.

- they hire subs and promise to pay them 100 cents on the $1.
- they set up a factoring company that pays these subs $.70 for these receivables.
- KB doesn't pay the subs, thus saving 30% on their costs
- the sub gave up their right to the 30% b/c they sold their receivables for cold, hard cash

Pretty brilliant, is it legal?

Of course it's not legal. As mentioned above, you factor your receivables, not your payables.

The last step doesn't even make sense. "the sub gave up their right to the 30% b/c they sold their receivables for cold, hard cash". The sub hasn't DONE anything, so they haven't given up any rights. Now if the SUB sold their invoice for 70%, then yes they would have given up 30% with no recourse.

I'm not familiar with anyone doing this. Not to say it doesn't happen, but I've never heard of it. The closest would be the 10% retainage some builders withhold. But even that usually gets paid.

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